USTR New Exclusive Right for Copyright Holders: Importation Provision in the Trans Pacific Partnership Agreement (TPPA)

At the recently completed Vietnam round of negotiations for the Trans-Pacific Partnership Agreement (TPPA), once again, no official text of negotiation was released. Therefore, we still need to speculate about its status, relying in part on a three-month-ago leaked version of the intellectual property chapter proposed by the Office of the United States Trade Representative (USTR).

This proposal includes a requirement that negotiating parties provide copyright holders the exclusive right to authorize importations, for "categories of products in which the value of the copyrighted material represents substantially all of the value of the product."

Article 4: Copyright and Related Rights

2. Each Party shall provide to authors, performers, and producers of phonograms the right to authorize or prohibit the importation into that Party’s territory of copies of the work, performance, or phonogram made without authorization, or made outside that Party’s territory with the authorization of the author, performer, or producer of the phonogram.fn.11

fn.11 With respect to copies of works and phonograms that have been placed on the market by the relevant right holder, the obligations described in Article [4.2] apply only to books, journals, sheet music, sound recordings, computer programs, and audio and visual works (i.e., categories of products in which the value of the copyrighted material represents substantially all of the value of the product). Notwithstanding the foregoing, each Party may provide the protection described in Article [4.2] to a broader range of goods.

The USTR introduced is proposal on intellectual property to negotiating parties at the round hosted in Chile, last February. Regarding copyright, much of the proposal is drafted as an upgrade of the Digital Millennium Copyright Act (DMCA), by adopting norms for the liability of online service providers, and the legal protections of technological protective measures and digital rights management information. However, some aspects of the proposal go well beyond the DMCA; including the proposal to require the granting to right holders of copyright and neighboring rights the exclusive economic right to control the importation of legitimate copies of works.

What does an exclusive right for importation mean?

Copyright holders already control reproduction, public performance and execution, modification, and distribution of works, and can decide where, when, and how distribute their works. However, in some countries, they are not able to control the importation of a legitimate acquired work from another country -- a practice known as parallel trade, one example of the principle of the exhaustion of rights, or the first sale doctrine.

If the US proposal to the TPPA IP chapter is accepted, right holders would be able to prevent third parties from importing legitimacy copies of works from one country to another, without authorization.

Currently, no multilateral international instrument on intellectual property grants to copyright holders an exclusive right to control the importation of works, so parallel importations are possible. Indeed, the World Trade Organization's Agreement on Trade Related Aspects of Intellectual Property (TRIPS) specifically eliminates the possibility of litigating dispuites over parallel trade, or any other aspect of the exhausion of rights.

Article 6 - Exhaustion

For the purposes of dispute settlement under this Agreement, subject to the provisions of Articles 3 and 4 nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights.

Even the ACTA agreement includes, as a footnote to the Chapter on Border measures, this text:

It is to be understood that there shall be no obligation to apply the procedures set forth in this section to goods put on the market in another country by or with the consent of the right holder.

Thus, under all important global norms for intellectual property, copyrighted goods can be provided simultaneously through two or more legitimate channels of distribution. The lack of an exclusive right to control importations facilitates the circulation of goods, favors a more intense competition among distributors, and benefits consumers in the importing country.

Right owners typically oppose parallel trade in copyrighted goods, because they prefer to control and segment their markets.

Conferring an exclusive economic right on importation is controversial not only because of its damage for competition and consumers, but also because of conflicts with domestic law in the United States and other TPPA-negotiating countries.

The U.S. Copyright Act sets forth the exclusive rights of copyright holders, but it makes no mention to an exclusive right to control the importation of works (Sec. 106). In fact, because of the silence of the Copyright Act, the U.S. Supreme Court has been required to answer the issue of controlling importation. In the Costco case, the well-known retailer sold copyrighted watches legitimately acquired in foreign markets without authorization of its right holder, who opposed that commercialization. To be clear, those were not "counterfeit" goods, but legitimate goods made by the right holder but initially intended for foreign markets. Unfortunately, last December, the U.S. Supreme Court adopted a tie-vote decision, which, according to the "Affirmance by an Equally Divided Court" doctrine, leaves the previous decision of the lower appellate federal court standing without resolving the raised constitutional issue. In sum, the Copyright Act does not resolve the issue and the Supreme Court has neither, but the USTR is attempting to change the existing flexibility.

If granting exclusive right on importation is controversial in the U.S., it is even more problematic for countries that have embraced free flow of (copyrighted) goods and services. In recent years, some TPPA negotiating parties have adopted international exhaustion of rights into their domestic laws, which means right holders do not control international free flow of their works; this is the case, for example, of Australia, Chile, Malaysia, New Zealand, and Singapore. Sacrificing consumers’ interest is highly problematic for those countries, because they cannot enjoy any advantage of scale economies. The New Zealand case illustrates the situation of those countries.

In 1998, New Zealand adopted the Copyright (Removal of Prohibition on Parallel Importing) Amendment Act 1998. The law embraced international exhaustion of rights, allowing parallel importations. In spite of being allowed by the TRIPS Agreement, in 1999, the USTR included New Zealand in the Watch List of the Special Report 301 because of the parallel importations. As a result of the USTR pressure, in 2003, New Zealand introduced some limitations in its Copyright Act, mainly in favor of films. Successive analysis has been conducted by the government respect to the parallel importation. In 2005, a government report found that lifting the ban on parallel importations has not affected the investment in and promotion of New Zealand creative sector, but improved choices and quality of services to retailers and consumers through increased competition, a result similar to Australia.

The case of New Zealand shows how parallel importations are particularly important for smaller economies. Almost all the countries involved in the TPPA negotiations are comparative small economies, including Chile and Australia. However, even in the U.S., this new right would clearly affect consumers and retailers, by increasing their access cost and limiting their business opportunities. USTR has aligned itself with the right holders.

The USTR’s proposal on this new exclusive rights for exportation will meet resistance from negotiators of those economies that have adopted international exhaustion of rights. After all, this is a decision that the TRIPS Agreement reserves to domestic law of the WTO-members (article 6). It would thus be interesting to know, what evidence or "studies" support the decision by the USTR to include an exclusive right for controlling importation in the TPP negotiations? And, how does it affect competition, and what wiil be the harm to consumers? How will the right be enforced in a digital environment, like the Internet?

Segmentation of markets and differences in national incomes

To the extent that copyright owners make the case that it is appropriate to segment markets between higher and lower income countries, in order to make copyrighted goods like films, books or computer games more affordable in developing countries, the agreement could be implemented in a more pro-competition manner. Specifically, the barriers to parallel trade could be limited to parallel trade from low income countries to high income countries, but be permitted between high income countries, and from high income markets to low income markets. Indeed, this proposal was explored by CPTech (the previous name for KEI), in 2002, in the context of a WTO negotiation on cross border movements on pharmaceutical drugs, and in various Congressional proposals concerning parallel trade for pharmaceutical drugs.

Appendix

Perhaps also relevant for US negotiators are the provisions in 19 USC 1337 concerning imports of goods that infringe copyrights (and other intellectual property rights). Here it is worth noting that under current U.S. law, it is possible to import even infringing works without the permission of the right owner, a possibility not provided for in the US proposal for legitimate copyrighted goods imported via parallel trade.

(a) Unlawful activities; covered industries; definitions
(1) Subject to paragraph (2), the following are unlawful, and when found by the Commission to exist shall be dealt with, in addition to any other provision of law, as provided in this section:
[snip]
(B) The importation into the United States, the sale for importation, or the sale within the United States after importation by the owner, importer, or consignee, of articles that—
(i) infringe a valid and enforceable United States patent or a valid and enforceable United States copyright registered under title 17; or

. . .
(d) Exclusion of articles from entry
(1) If the Commission determines, as a result of an investigation under this section, that there is a violation of this section, it shall direct that the articles concerned, imported by any person violating the provision of this section, be excluded from entry into the United States, unless, after considering the effect of such exclusion upon the public health and welfare, competitive conditions in the United States economy, the production of like or directly competitive articles in the United States, and United States consumers, it finds that such articles should not be excluded from entry. The Commission shall notify the Secretary of the Treasury of its action under this subsection directing such exclusion from entry, and upon receipt of such notice, the Secretary shall, through the proper officers, refuse such entry.

. . .

(l) Importation by or for United States
Any exclusion from entry or order under subsection (d), (e), (f), (g), or (i) of this section, in cases based on a proceeding involving a patent, copyright, mask work, or design under subsection (a)(1) of this section, shall not apply to any articles imported by and for the use of the United States, or imported for, and to be used for, the United States with the authorization or consent of the Government. Whenever any article would have been excluded from entry or would not have been entered pursuant to the provisions of such subsections but for the operation of this subsection, an owner of the patent, copyright, mask work, or design adversely affected shall be entitled to reasonable and entire compensation in an action before the United States Court of Federal Claims pursuant to the procedures of section 1498 of title 28.